Prasanna Tantri, an associate professor of finance at the Indian School of Business (ISB), has issued a stark warning regarding India's current economic trajectory, stating that the nation cannot sustain zero real interest rates indefinitely. Tantri argues that the Reserve Bank of India's (RBI) ongoing monetary easing efforts, intended to defend the rupee and maintain artificially low interest rates, are likely to ignite inflationary pressures and jeopardize financial stability.
Concerns Over Rupee Defense and Broad Money Supply
In his analysis, Professor Tantri highlighted a significant loss incurred in the RBI's efforts to stabilize the rupee. "We have already lost $43 billion of the $143 billion in borrowed money raised under RBI guarantee to defend the rupee," Tantri stated. He criticized the reliance on what he termed "Band-Aid solutions" and the tendency to blame external factors like speculators, emphasizing that such approaches cannot prevent inflation when the broad money supply has surged to nearly 90% of GDP—a level last observed during the COVID-19 pandemic. He also pointed out the substantial swelling of the RBI's balance sheet as a contributing factor.
Tantri further warned that the 10-year government bond yield is showing signs of rising independently of RBI policy, threatening the stability in long-term yields that was achieved at considerable cost. He stressed the urgency for policymakers to act decisively now, or face the necessity of much more aggressive interventions later, especially when other global economies offer positive real returns.
Excessive Monetary Expansion and Quantitative Easing
The finance professor has consistently raised concerns about excessive monetary expansion. While he welcomed the RBI's recent 25-basis-point increase in the benchmark repo rate, he noted it came "9–12 months late." Tantri disputes the RBI's focus on external factors like crude oil prices as the primary cause of inflation, asserting that the central problem lies in the substantial monetary expansion.
By his estimates, the RBI's balance sheet expanded from approximately ₹70 lakh crore to nearly ₹100 lakh crore over the preceding year. He calculated that monetary easing injected an additional ₹20–30 lakh crore into broad money, pushing it to roughly ₹330 lakh crore, or more than 90% of the previous financial year's GDP. Tantri questioned the rationale behind such "extraordinary measures"—typically reserved for recessions or deflation—in an economy growing at around 7%.
FCNR(B) Deposits and Rising Household Debt
Tantri also argued that the mobilization of Foreign Currency Non-Resident (Bank) or FCNR(B) deposits has compounded the issue. He estimated that the subsequent credit expansion from these deposits could add another ₹30–40 lakh crore to the broad money supply. He cautioned that prolonged monetary easing could become exceedingly difficult to reverse, drawing parallels with the experiences of Europe and Japan. A particular concern highlighted was the potential for this additional money to finance consumption loans, leading to increased household debt, heightened financial fragility, and further inflationary pressure.
Call for RBI Action Amid Falling Forex Reserves
Professor Tantri urged the RBI to reduce its balance sheet to 25% of GDP or less and to curb monetary expansion. While acknowledging that this might entail a short-term sacrifice in growth, he maintained that preserving long-term economic stability is a worthwhile trade-off.
His warning comes amidst a notable decline in India's foreign exchange reserves, which have fallen by over $50 billion in approximately a month, despite record foreign currency mobilization through FCNR(B) deposits. RBI data shows reserves peaking at $785.71 billion in early September before dropping to $734.6 billion by early October. This decline underscores continued pressure on the rupee and ongoing intervention by the central bank in the foreign exchange market.
Earlier this year, the RBI had introduced a special concessional swap window to facilitate banks raising FCNR(B) deposits. Banks successfully raised a record $132.98 billion, leading the RBI to close the window ahead of schedule. Despite these inflows, the rupee has remained under pressure due to geopolitical tensions, conflicts in West Asia, elevated crude oil prices, and sustained selling by foreign institutional investors in Indian equities.